October 25, 2010
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MARKET RECAP
We can't say that the post-tax credit lull is officially over, but recent housing data lead us to believe it is. Housing starts again surprised on the upside, increasing 0.3 percent in September to 610,000 seasonally adjusted annual units, after jumping 10.5 percent in August. More importantly, single-family starts were noticeably stronger, increasing 4.4 percent month-to-month.
Gains in the immediate future might be tougher to come by. Permits declined 5.6 percent, lead by an acute decline in the multi-family segment, which tumbled 20.2 percent after a 9.8 percent rise in August. The bad news on multi-family permits – which tend to be volatile anyway – is offset somewhat by the good news that single-family permits edged up 0.5 percent.
Improving sales and more construction helped lift the Housing Market Index – a gauge of homebuilder sentiment – to a 16 reading in October after posting at 13 in September. Although the sentiment is still low, it should continue to improve: the HMI component for sales expected in the next six months rose to 23 from September's 18.
We don't want to minimize legitimate concerns, but the tendency is to extrapolate near-term news farther into the future than it probably deserves. Admittedly, news has been underwhelming due to tax-credit expirations, sluggish job growth, shadow inventory build up and foreclosure-gate, but these things can pass as quickly as they come. Indeed, we are already seeing reports that last week's fears of a country-wide foreclosure meltdown were seriously overdone.
In the meantime, mortgage rates remain stable (which also means they show little inclination to go lower), as do home prices, so it's important to keep the long term in perspective. Few people doubt that there's a high probability that a refinance or a home purchase today will look like a very savvy investment five years hence.
Another Reason We Think Home Prices Have Bottomed
Last week we discussed quantitative easing and the prospect of the Federal Reserve injecting more money into the banking system. The scuttlebutt on the street says the Fed could pump another trillion dollars into the system through Treasury-bond purchases. It's no slam-dunk, though; the money supply is already at an all-time high, according to the St. Louis Bank of the Federal Reserve.
Because of heightened uncertainty, new money has had only a minor impact on consumer prices. In other words, consumer-price inflation remains low (though prices haven't been falling either). Much of the inflation associated with the new money has shown up in the investment markets instead, particularly in stock and gold prices.
We think it's only a matter of time before consumer prices come under inflationary pressure. The fact is that even if the Federal Reserve doesn't add more money to the system, the banks could. They are sitting on $980 billion of excess reserves, which could easily be drawn into the loan markets, thus further expanding the money supply.
All this money and the potential for even more money will help keep home prices stable in nominal terms. And it's these nominal values that serve as the basis for home appraisals and loan amounts. In other words, if the Fed's goal were to maintain a median home price of $200,000, it could theoretically pump enough money into the economy to make it happen. It wouldn't necessarily be a good idea, but it is an option if price stability were the goal.
Monday, October 25, 2010
Monday, September 13, 2010
Housing Market Today
Keeping you updated on the market!
For the week of
September 13, 2010
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MARKET RECAP
Thanks to the Labor Day holiday, little housing news hit the wires this past week. But the dearth of hard data gave bloggers and pundits more time to voice their opinions.
At Housingwire.com, real estate data provider Clear Capital reported that home prices gained 5.7 percent over the three months ending in August. That would appear to be good news, but the analysts at Clear Capital were quick to note that price growth has slowed and will drop next year, possibly dropping below 2009 levels.
It's worth noting that Clear Capital's 5.7 percent gain is a national average. Real estate is local, and becoming even more so. Clear Capital noted that with the various government incentives, residential real estate nationally tended to move in the same proportions in the same direction. That's no longer the case. Today, we are seeing real estate respond more to the vagaries of local markets than to national trends. In other words, prices could weaken nationally, but that doesn't preclude local markets from stabilizing and even appreciating. After all, it takes only one outlier to skew an average. (For example, if Warren Buffett, you, and eight of your closest friends were in a room, the average net worth of each person in that room would exceed $5 billion.)
Meanwhile, over at the New York Times, various bloggers of various reputations were lamenting that markets still aren't clearing at today's prices, which means prices must continue to fall. The logic appears sound: lower prices do stimulate demand and will clear inventory. But that logic is more applicable to trade-value goods – goods that are produced to be sold. Housing is different; it has a use-value component (at least existing homes do). Most of us buy a house as a dwelling, not as good to trade. If we don't like the price when we consider selling, we're more likely to remove our house from the market, thus lowering supply, which, in turn, tends to stabilize and raise prices.
In short, no one knows where housing prices will be this time next year. We think they will correlate negatively with the unemployment rate: if the rate drops, prices will rise and vice versa.
We also think mortgage rates will correlate negatively with the unemployment rate. As the unemployment rate drops, mortgage rates will move higher. Granted, that doesn't seem to be much of a concern today, with the unemployment rate stubbornly holding at 9.6 percent, but things can change in a hurry (on one bullish employment report or one spike in the consumer price index), which is why it's worth remembering that sub-five percent 30-year fixed-rate mortgages are the anomaly, not the norm.
The Perspective from the Great White North
Sometimes it's good to get an outside perspective of things, which is what the Financial Post, a Canadian national newspaper, provided a week ago. While a pile-up of weak US economic data has turned domestic consumer and investor sentiment sour over the past few weeks, the view from north of the border is that things aren't really that bad down here.
Indeed, many money managers in Canada are taking a hard look at our markets and investing more of their money. The smart money managers (it's worth noting that Canada avoided the banking implosion that rocked the United States and Europe ) are taking their time to analyze the news. After weighing some of the disappointing data of recent weeks, including weak jobs and home sales numbers, against more positive indicators such as the latest ISM survey, they have seized the opportunity to buy assets on the cheap.
While there is no question that the US economy has stalled and growth moving forward will be modest, many Canadians are convinced that the recovery is sustainable and the chance of a double dip is low. Perhaps we should heed their business acumen and consider the opportunities that have presented themselves.
For the week of
September 13, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Thanks to the Labor Day holiday, little housing news hit the wires this past week. But the dearth of hard data gave bloggers and pundits more time to voice their opinions.
At Housingwire.com, real estate data provider Clear Capital reported that home prices gained 5.7 percent over the three months ending in August. That would appear to be good news, but the analysts at Clear Capital were quick to note that price growth has slowed and will drop next year, possibly dropping below 2009 levels.
It's worth noting that Clear Capital's 5.7 percent gain is a national average. Real estate is local, and becoming even more so. Clear Capital noted that with the various government incentives, residential real estate nationally tended to move in the same proportions in the same direction. That's no longer the case. Today, we are seeing real estate respond more to the vagaries of local markets than to national trends. In other words, prices could weaken nationally, but that doesn't preclude local markets from stabilizing and even appreciating. After all, it takes only one outlier to skew an average. (For example, if Warren Buffett, you, and eight of your closest friends were in a room, the average net worth of each person in that room would exceed $5 billion.)
Meanwhile, over at the New York Times, various bloggers of various reputations were lamenting that markets still aren't clearing at today's prices, which means prices must continue to fall. The logic appears sound: lower prices do stimulate demand and will clear inventory. But that logic is more applicable to trade-value goods – goods that are produced to be sold. Housing is different; it has a use-value component (at least existing homes do). Most of us buy a house as a dwelling, not as good to trade. If we don't like the price when we consider selling, we're more likely to remove our house from the market, thus lowering supply, which, in turn, tends to stabilize and raise prices.
In short, no one knows where housing prices will be this time next year. We think they will correlate negatively with the unemployment rate: if the rate drops, prices will rise and vice versa.
We also think mortgage rates will correlate negatively with the unemployment rate. As the unemployment rate drops, mortgage rates will move higher. Granted, that doesn't seem to be much of a concern today, with the unemployment rate stubbornly holding at 9.6 percent, but things can change in a hurry (on one bullish employment report or one spike in the consumer price index), which is why it's worth remembering that sub-five percent 30-year fixed-rate mortgages are the anomaly, not the norm.
The Perspective from the Great White North
Sometimes it's good to get an outside perspective of things, which is what the Financial Post, a Canadian national newspaper, provided a week ago. While a pile-up of weak US economic data has turned domestic consumer and investor sentiment sour over the past few weeks, the view from north of the border is that things aren't really that bad down here.
Indeed, many money managers in Canada are taking a hard look at our markets and investing more of their money. The smart money managers (it's worth noting that Canada avoided the banking implosion that rocked the United States and Europe ) are taking their time to analyze the news. After weighing some of the disappointing data of recent weeks, including weak jobs and home sales numbers, against more positive indicators such as the latest ISM survey, they have seized the opportunity to buy assets on the cheap.
While there is no question that the US economy has stalled and growth moving forward will be modest, many Canadians are convinced that the recovery is sustainable and the chance of a double dip is low. Perhaps we should heed their business acumen and consider the opportunities that have presented themselves.
Tuesday, September 7, 2010
The Housing Market
Keeping you updated on the market! For the week of
September 6, 2010
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MARKET RECAP
Most people would agree that it's best to maintain an even keel – don't get too up or too down about circumstances. That advice is particularly pertinent when following the weekly housing and mortgage data. The most recent fortnight serves as a perfect example: Last week, the data were mostly down; this week, the data are mostly up.
This week, the S&P Case-Shiller home price index posted a 1 percent rise in June, with 18 of 20 metropolitan areas posting price increases. The Case-Shiller index has been relatively steady over the past few months, and that's encouraging, but we need to keep in mind that the index will be presenting a post-tax-credit market going forward, so we wouldn't be surprised to see some price easing, as long as the mix of homes sold hasn't substantially changed.
This week also gave us news that the number of buyers who signed contracts to purchase existing homes rose in July, with the Pending Home Sales Index rising 5.2 percent to 79.4. The optimist in us believes this could lead to an increase in existing-home sales in September, but the pessimist in us still sees a double-digit months supply for some time.
On the other hand, “some time” might not necessarily be a long time. Economist Karl Case (of the Case-Shiller home price index) provided a useful (if not obvious) perspective on just how affordable houses are these days. In short, Case notes that four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of 6.6 percent was $1,533. Today that $300,000 house would sell (on average) for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. What's more, the 20-percent down payment would be knocked down to $42,600 from $60,000.
Case makes another cogent point in noting that in a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Therefore, it doesn’t require a large number of buyers to change the overall direction of the market. That's a point we've been making over the past year. And even though sentiment hasn't turned for the better, it's worth noting that it can turn on a dime.
We've also noted that mortgage rates are apt to turn on a dime. To be sure, rates seem to post new lows each week, but the drops have been marginally incremental in many cases. At this point, we think it's more of a game of chicken – holding out for small return at big risk – than anything else. New data, like Friday's employment report, which showed a better-than-expected net loss of 54,000 jobs (mostly temporary census workers) while the private sector added a better-than-expected 67,000 new jobs, can easily produce dime-turning moments.
. A More Sensible Solution
Franklin Roosevelt famously said in his 1932 inaugural address “the only thing we have to fear is fear itself.” Roosevelt went on to define fear as “nameless, unreasoning, unjustified terror.”
Fear is one emotion holding back the housing market today. In this case, though, it isn't nameless, unreasoning or unjustified. It's really a fear of potential conflicts. The New York Times reported how a maze of government incentives and regulations are working against each other and Fed policy to keep a floor from forming in the market. In short, one incentive for one segment of the market tends to counteract the progress in another segment.
More market participation is one incentive the government could provide that wouldn't hamper any segment. More demand is the best way to soak up excess supply and stabilize prices.
We think more flexible underwriting standards would be the most inclusive and effective way toward achieving that goal. Convincing Freddie Mac, Fannie Mae, and FHA to jettison FICO scores might be a good start. The past couple years have roughed up the FICO scores for many potential borrowers who would be good credit risks today. Focusing on the basics, such as sufficient residual income and adequate reserves to cover loss of job or increase in liabilities, can be just as insightful as FICO scores at vetting lending risk while at the same time expanding demand.
September 6, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Most people would agree that it's best to maintain an even keel – don't get too up or too down about circumstances. That advice is particularly pertinent when following the weekly housing and mortgage data. The most recent fortnight serves as a perfect example: Last week, the data were mostly down; this week, the data are mostly up.
This week, the S&P Case-Shiller home price index posted a 1 percent rise in June, with 18 of 20 metropolitan areas posting price increases. The Case-Shiller index has been relatively steady over the past few months, and that's encouraging, but we need to keep in mind that the index will be presenting a post-tax-credit market going forward, so we wouldn't be surprised to see some price easing, as long as the mix of homes sold hasn't substantially changed.
This week also gave us news that the number of buyers who signed contracts to purchase existing homes rose in July, with the Pending Home Sales Index rising 5.2 percent to 79.4. The optimist in us believes this could lead to an increase in existing-home sales in September, but the pessimist in us still sees a double-digit months supply for some time.
On the other hand, “some time” might not necessarily be a long time. Economist Karl Case (of the Case-Shiller home price index) provided a useful (if not obvious) perspective on just how affordable houses are these days. In short, Case notes that four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of 6.6 percent was $1,533. Today that $300,000 house would sell (on average) for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. What's more, the 20-percent down payment would be knocked down to $42,600 from $60,000.
Case makes another cogent point in noting that in a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Therefore, it doesn’t require a large number of buyers to change the overall direction of the market. That's a point we've been making over the past year. And even though sentiment hasn't turned for the better, it's worth noting that it can turn on a dime.
We've also noted that mortgage rates are apt to turn on a dime. To be sure, rates seem to post new lows each week, but the drops have been marginally incremental in many cases. At this point, we think it's more of a game of chicken – holding out for small return at big risk – than anything else. New data, like Friday's employment report, which showed a better-than-expected net loss of 54,000 jobs (mostly temporary census workers) while the private sector added a better-than-expected 67,000 new jobs, can easily produce dime-turning moments.
. A More Sensible Solution
Franklin Roosevelt famously said in his 1932 inaugural address “the only thing we have to fear is fear itself.” Roosevelt went on to define fear as “nameless, unreasoning, unjustified terror.”
Fear is one emotion holding back the housing market today. In this case, though, it isn't nameless, unreasoning or unjustified. It's really a fear of potential conflicts. The New York Times reported how a maze of government incentives and regulations are working against each other and Fed policy to keep a floor from forming in the market. In short, one incentive for one segment of the market tends to counteract the progress in another segment.
More market participation is one incentive the government could provide that wouldn't hamper any segment. More demand is the best way to soak up excess supply and stabilize prices.
We think more flexible underwriting standards would be the most inclusive and effective way toward achieving that goal. Convincing Freddie Mac, Fannie Mae, and FHA to jettison FICO scores might be a good start. The past couple years have roughed up the FICO scores for many potential borrowers who would be good credit risks today. Focusing on the basics, such as sufficient residual income and adequate reserves to cover loss of job or increase in liabilities, can be just as insightful as FICO scores at vetting lending risk while at the same time expanding demand.
Wednesday, August 25, 2010
Would this be a good time to buy a home?
Keeping you updated on the market!
For the week of
August 23, 2010
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MARKET RECAP
Charles Dickens famously begins A Tale of Two Cities with “It was the best of times, it was the worst of times.” Further into that first sentence, and keeping with the opposing theme, he writes “it was the spring of hope, and the winter of despair.” Dickens obviously wasn't referring to the housing market, but maybe the sentiment applies.
It just might be the best of times for some (discussed below), though the worst of times is more easily grasped. Look no further than homebuilders: a few are feeling like it is the worst of times, at least when gauging sentiment. On that front, the housing market index fell for a third-consecutive month in August, posting at 13. To put current sentiment in perspective, a reading above 50 indicates more builders view sales conditions positively. The index hasn't seen 50 in more than three years.
Not surprisingly, homebuilders are expressing the same concerns that most of us are expressing: they sense that the economy, in general, and the job market, in particular, are losing traction. The trend in job creation is particularly worrisome. Weekly jobless claims continue their upward climb, posting a 2.4 percent increase for the week ended August 14 to hit a nine-month high.
The news wasn't all cold porridge and damp weather, though. Housing starts in July posted a modest comeback, rising 1.7 percent, to an annualized pace of 546,000 units. Granted, the gain was due primarily to a technical rebound in the multifamily component, but it's still good news nonetheless. As for the single-family component, it slipped slightly on both starts and permits.
At least mortgage rates continue to help keep the affordability quotient high. Rates did rise slightly across the board this past week, but they remain near multi-decade lows. That said, we continue to advise –yet again – not to wait on either a refinance or a purchase. We still see too much complacency in the market: borrowers thinking that low rates are going to be around forever. They won't, and they can rise in a hurry.
We understand that frustration is keeping many potential borrowers on the sidelines. On the one hand, they read about federal programs aimed at boosting home sales and refinances, and then on the other hand, they face the reality of Fannie Mae's and Freddie Mac's lending standards. Our advice: Try anyway. Borrowers are often surprised (pleasantly) that solutions really do exist.
More Solutions We'd Like to See
For many mortgage-loan and housing investors, the current market just might be the best of times, particularly for those investors pejoratively known as “vulture” investors – investors who seek value in distressed situations.
In one incarnation, vulture investors acquire mortgage loans at a deep discount and then renegotiate terms with the borrower to repay at a substantial discount. For example, if investors pay $100,000 for a loan with a $200,000 balance due, they might negotiate a $140,000 balance with the borrower.
It's an obvious win-win situation: the investor still makes money on his investment and the homeowner still keeps his home, with lower payments and a reduced balance. What's more, cutting the loan balance might be the most effective way to motivate borrowers to resume payments, because it gives them more hope of eventually owning the home.
Over the past two years, less than $25 billion of delinquent mortgages have been sold to “vulture” investors. This represents only 0.25 percent of US home loans outstanding, according to the Wall Street Journal. But the percentage is likely to grow as banks try to clean up their books before year end.
Let's hope that's the case, because vulture investors aren't as ugly as the name implies. In fact, they might be a real beauty for us, clearing the market much more expediently of unwanted inventory than either the big banks or the federal government.
For the week of
August 23, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Charles Dickens famously begins A Tale of Two Cities with “It was the best of times, it was the worst of times.” Further into that first sentence, and keeping with the opposing theme, he writes “it was the spring of hope, and the winter of despair.” Dickens obviously wasn't referring to the housing market, but maybe the sentiment applies.
It just might be the best of times for some (discussed below), though the worst of times is more easily grasped. Look no further than homebuilders: a few are feeling like it is the worst of times, at least when gauging sentiment. On that front, the housing market index fell for a third-consecutive month in August, posting at 13. To put current sentiment in perspective, a reading above 50 indicates more builders view sales conditions positively. The index hasn't seen 50 in more than three years.
Not surprisingly, homebuilders are expressing the same concerns that most of us are expressing: they sense that the economy, in general, and the job market, in particular, are losing traction. The trend in job creation is particularly worrisome. Weekly jobless claims continue their upward climb, posting a 2.4 percent increase for the week ended August 14 to hit a nine-month high.
The news wasn't all cold porridge and damp weather, though. Housing starts in July posted a modest comeback, rising 1.7 percent, to an annualized pace of 546,000 units. Granted, the gain was due primarily to a technical rebound in the multifamily component, but it's still good news nonetheless. As for the single-family component, it slipped slightly on both starts and permits.
At least mortgage rates continue to help keep the affordability quotient high. Rates did rise slightly across the board this past week, but they remain near multi-decade lows. That said, we continue to advise –yet again – not to wait on either a refinance or a purchase. We still see too much complacency in the market: borrowers thinking that low rates are going to be around forever. They won't, and they can rise in a hurry.
We understand that frustration is keeping many potential borrowers on the sidelines. On the one hand, they read about federal programs aimed at boosting home sales and refinances, and then on the other hand, they face the reality of Fannie Mae's and Freddie Mac's lending standards. Our advice: Try anyway. Borrowers are often surprised (pleasantly) that solutions really do exist.
More Solutions We'd Like to See
For many mortgage-loan and housing investors, the current market just might be the best of times, particularly for those investors pejoratively known as “vulture” investors – investors who seek value in distressed situations.
In one incarnation, vulture investors acquire mortgage loans at a deep discount and then renegotiate terms with the borrower to repay at a substantial discount. For example, if investors pay $100,000 for a loan with a $200,000 balance due, they might negotiate a $140,000 balance with the borrower.
It's an obvious win-win situation: the investor still makes money on his investment and the homeowner still keeps his home, with lower payments and a reduced balance. What's more, cutting the loan balance might be the most effective way to motivate borrowers to resume payments, because it gives them more hope of eventually owning the home.
Over the past two years, less than $25 billion of delinquent mortgages have been sold to “vulture” investors. This represents only 0.25 percent of US home loans outstanding, according to the Wall Street Journal. But the percentage is likely to grow as banks try to clean up their books before year end.
Let's hope that's the case, because vulture investors aren't as ugly as the name implies. In fact, they might be a real beauty for us, clearing the market much more expediently of unwanted inventory than either the big banks or the federal government.
Monday, August 16, 2010
Mortgage Market for Aug. 16, 2010
August 16, 2010
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MARKET RECAP
Since the beginning of the year, we've been saying the housing recovery is predicated on a jobs recovery. And although we've been encouraged that we've been making progress on the jobs front in recent months, the latest weekly unemployment-insurance claims news leaves us a little concerned – with claims growing to a six-month high of 484,000. We'd like to say it's an anomaly, but the four-week average has been moving up as well. Unfortunately, this trend doesn't bode well for the August employment report.
We can take some comfort knowing that foreclosure filings dropped 9.7 percent in July, compared to the same year-ago period, to post a second-consecutive month of year-over-year declines, according to RealtyTrac. Nevertheless, there were over 325,000 properties that received a filing, which marks the 17th-consecutive month that foreclosure activity exceeded the 300,000 level. The good news is that the trend remains mostly down in the top-ten metropolitan-statistical areas RealtyTrac follows and that the usual suspects – Nevada , Arizona , and Florida – continue to skew the data.
Even though job growth is weakening, we still think home prices will remain stable. The NAR reported that the median price for resales of single-family homes increased in 100 of the 155 metropolitan areas it tracks, with the national median price for a single-family home posting at $176,900 in the second quarter of 2010, a 1.5 percent gain compared to the second quarter of 2009.
We'd be remiss not to mention the obvious: the NAR's report included a rush to take advantage of expiring federal tax credits. This artificial stimulus has a few pessimistic market watchers expecting home prices to ease in subsequent months. To be sure, the NAR's third-quarter report could show some price easing, but recent monthly price data from Case-Shiller and the Federal Housing Finance Authority suggest, if not an up trend, at least a stable pricing environment in most metropolitan areas.
Mortgage rates, in contrast, are in an obvious downtrend. We regularly see the 30-year fixed-rate mortgage quoted in the 4.25 percent vicinity (with points and no risk adjustments), and the 15-year fixed-rate loan regularly quoted in the 3.75 percent-to-4.00 percent range.
So why the relentless downtrend in mortgage rates? The most recent decline came courtesy of a rush to buy Treasury 10-year notes, which pushed their yield down to a 16-month low. (Treasury yields influence mortgage rates.) In addition, Federal Reserve officials announced plans to buy $18 billion of Treasury debt and Treasury Inflation Protected Securities through mid-September. These purchases could further constrict Treasury yields; thus, helping keep mortgage rates low – likely through the end of summer.
What Does Warren Think?
We are speaking of Warren Buffett of course, Omaha , Nebraska 's legendary investing sage. In August 2009, Mr. Buffett penned a New York Times op-ed warning that lawmakers will be tempted to let the Federal Reserve print money (an inflationary, usually interest-rate raising strategy) to deal with the growing national debt.
Today, Mr. Buffett is taking no chances. He recently shortened the duration of the portfolio of bonds held by Berkshire Hathaway (investors shorten bond duration when they expect inflation, lengthen it when they expect deflation), the company in which he serves as CEO. In short, Mr. Buffett is expecting inflation, not deflation, to be the overriding economic concern in the not-too-distant future.
Mr. Buffet has been right, in that the Fed has printed more – a lot more – money over the past year, but so far has done so with impunity. But it's worth keeping in mind that within a system as complex and as unwieldy as our national economy, inflation doesn't just pop up when expected; the timing is unpredictable, and it will likely happen faster than the market anticipates. Therefore, we still don't believe procrastinating for lower rates is a worthwhile strategy, nor do we believe it's a worthwhile strategy to bet against someone who has been so often right as Warren Buffett.
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--------------------------------------------------------------------------------
MARKET RECAP
Since the beginning of the year, we've been saying the housing recovery is predicated on a jobs recovery. And although we've been encouraged that we've been making progress on the jobs front in recent months, the latest weekly unemployment-insurance claims news leaves us a little concerned – with claims growing to a six-month high of 484,000. We'd like to say it's an anomaly, but the four-week average has been moving up as well. Unfortunately, this trend doesn't bode well for the August employment report.
We can take some comfort knowing that foreclosure filings dropped 9.7 percent in July, compared to the same year-ago period, to post a second-consecutive month of year-over-year declines, according to RealtyTrac. Nevertheless, there were over 325,000 properties that received a filing, which marks the 17th-consecutive month that foreclosure activity exceeded the 300,000 level. The good news is that the trend remains mostly down in the top-ten metropolitan-statistical areas RealtyTrac follows and that the usual suspects – Nevada , Arizona , and Florida – continue to skew the data.
Even though job growth is weakening, we still think home prices will remain stable. The NAR reported that the median price for resales of single-family homes increased in 100 of the 155 metropolitan areas it tracks, with the national median price for a single-family home posting at $176,900 in the second quarter of 2010, a 1.5 percent gain compared to the second quarter of 2009.
We'd be remiss not to mention the obvious: the NAR's report included a rush to take advantage of expiring federal tax credits. This artificial stimulus has a few pessimistic market watchers expecting home prices to ease in subsequent months. To be sure, the NAR's third-quarter report could show some price easing, but recent monthly price data from Case-Shiller and the Federal Housing Finance Authority suggest, if not an up trend, at least a stable pricing environment in most metropolitan areas.
Mortgage rates, in contrast, are in an obvious downtrend. We regularly see the 30-year fixed-rate mortgage quoted in the 4.25 percent vicinity (with points and no risk adjustments), and the 15-year fixed-rate loan regularly quoted in the 3.75 percent-to-4.00 percent range.
So why the relentless downtrend in mortgage rates? The most recent decline came courtesy of a rush to buy Treasury 10-year notes, which pushed their yield down to a 16-month low. (Treasury yields influence mortgage rates.) In addition, Federal Reserve officials announced plans to buy $18 billion of Treasury debt and Treasury Inflation Protected Securities through mid-September. These purchases could further constrict Treasury yields; thus, helping keep mortgage rates low – likely through the end of summer.
What Does Warren Think?
We are speaking of Warren Buffett of course, Omaha , Nebraska 's legendary investing sage. In August 2009, Mr. Buffett penned a New York Times op-ed warning that lawmakers will be tempted to let the Federal Reserve print money (an inflationary, usually interest-rate raising strategy) to deal with the growing national debt.
Today, Mr. Buffett is taking no chances. He recently shortened the duration of the portfolio of bonds held by Berkshire Hathaway (investors shorten bond duration when they expect inflation, lengthen it when they expect deflation), the company in which he serves as CEO. In short, Mr. Buffett is expecting inflation, not deflation, to be the overriding economic concern in the not-too-distant future.
Mr. Buffet has been right, in that the Fed has printed more – a lot more – money over the past year, but so far has done so with impunity. But it's worth keeping in mind that within a system as complex and as unwieldy as our national economy, inflation doesn't just pop up when expected; the timing is unpredictable, and it will likely happen faster than the market anticipates. Therefore, we still don't believe procrastinating for lower rates is a worthwhile strategy, nor do we believe it's a worthwhile strategy to bet against someone who has been so often right as Warren Buffett.
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Monday, June 21, 2010
Update June, 21, 2010
June 21, 2010
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MARKET RECAP
Some people are just unsure of where they're going. We'll slot homebuilders into this category. After posting steady gains over the past few months, the National Association of Homebuilders/Wells Fargo Housing Market Index tanked five points to 17, which means homebuilders have turned sour once again.
The mood change is understandable, given that housing starts sank to their lowest levels in five months. The numbers are hardly encouraging: starts fell 10 percent in May from April to a seasonally adjusted annual rate of 593,000 units. The good news is that compared to the same time last year, starts are up 7.8 percent.
The drop should have been anticipated. In the previous two months, improvements were driven by federal tax credits, which are now gone. We've noted in past editions that the current activity pattern isn't unprecedented, using the purchasing patterns in automobiles as an example. After the cash-for-clunkers program expired, auto sales plummeted, but then recovered steadily over subsequent months. The fact is, we are transitioning from a government-aided recovery to a more-sustainable market-based one. And while it takes time for the transition to occur, it won't be pain free.
Even though new homes aren't getting the attention from potential buyers that homebuilders desire, more people are buying – at least that appeared to be the case last week. The Mortgage Bankers Association reported that purchase activity rose 7.3 percent, halting a plunge that took the measure the prior week to the lowest level since 1997.
Refinances were also on the upswing last week, thanks to more borrowers believing mortgage rates are about as low as they can go. Our mantra on the subject remains unchanged: rate decreases will be marginal at best. Many borrowers, though, are relentless bargain hunters and want the absolute best rate possible, which leads to the inevitable question: should I lock shortly after applying or wait until the closing date is near?
Sometimes the decision is made for you; some banks require a lock when the application is sent. Many borrowers wish to lock as soon as possible anyway. We suggest that once the rate is locked you stop checking rates; there is no sense stirring up feelings of remorse over a few basis points. Life is too short.
On the other hand, some borrowers are risk accepting (at least that's what they say), and they want those few basis points. To those people we say “go for it,” but only if they are willing to accept the very real risk, and won't be driven to agony, by a rate spike. No one, us included, can know with certainty where rates will be 30 days from now. But if the choice is between noticeably higher or noticeably lower, we'd side with the former.
How Risky is this Market?
The May/June edition of the Financial Analyst Journal featured an article titled “Dimensioning the Housing Crisis” (available for download at CFAinstitute.org). The article is noteworthy for encapsulating the problems of the housing market in a mere 12 pages.
The article is replete with sundry graphs, most of which accentuate just how bad things got over the past two years. One graph features the spike in first-time defaults; another features the seemingly exponential growth in housing overhang; yet another features the precipitous drop in cure rates for 30-day, 60-day, and 90-day delinquencies. The author notes, in pointed prose, that “we have a housing problem that affects 11 million to 12 million units. If nothing is done, more than one homeowner out of every five will face eviction.”
It's a pessimism-inducing article, to be sure, but we remain upbeat nonetheless. Reason being, these problems are well documented today, which means there are few shocks left to rock the market. What's seen isn't what kills, it's what's unseen.
Savvy buyers know that the time to buy isn't when everything is dear but when everything is disdained. Everything in housing isn't disdained, but sentiment remains low. So, we ask ourselves, was it riskier to buy a house in 2006 or is it riskier to buy one today? The sentiment feels riskier today, but the data show that 2006 was overwhelmingly riskier.
--------------------------------------------------------------------------------
MARKET RECAP
Some people are just unsure of where they're going. We'll slot homebuilders into this category. After posting steady gains over the past few months, the National Association of Homebuilders/Wells Fargo Housing Market Index tanked five points to 17, which means homebuilders have turned sour once again.
The mood change is understandable, given that housing starts sank to their lowest levels in five months. The numbers are hardly encouraging: starts fell 10 percent in May from April to a seasonally adjusted annual rate of 593,000 units. The good news is that compared to the same time last year, starts are up 7.8 percent.
The drop should have been anticipated. In the previous two months, improvements were driven by federal tax credits, which are now gone. We've noted in past editions that the current activity pattern isn't unprecedented, using the purchasing patterns in automobiles as an example. After the cash-for-clunkers program expired, auto sales plummeted, but then recovered steadily over subsequent months. The fact is, we are transitioning from a government-aided recovery to a more-sustainable market-based one. And while it takes time for the transition to occur, it won't be pain free.
Even though new homes aren't getting the attention from potential buyers that homebuilders desire, more people are buying – at least that appeared to be the case last week. The Mortgage Bankers Association reported that purchase activity rose 7.3 percent, halting a plunge that took the measure the prior week to the lowest level since 1997.
Refinances were also on the upswing last week, thanks to more borrowers believing mortgage rates are about as low as they can go. Our mantra on the subject remains unchanged: rate decreases will be marginal at best. Many borrowers, though, are relentless bargain hunters and want the absolute best rate possible, which leads to the inevitable question: should I lock shortly after applying or wait until the closing date is near?
Sometimes the decision is made for you; some banks require a lock when the application is sent. Many borrowers wish to lock as soon as possible anyway. We suggest that once the rate is locked you stop checking rates; there is no sense stirring up feelings of remorse over a few basis points. Life is too short.
On the other hand, some borrowers are risk accepting (at least that's what they say), and they want those few basis points. To those people we say “go for it,” but only if they are willing to accept the very real risk, and won't be driven to agony, by a rate spike. No one, us included, can know with certainty where rates will be 30 days from now. But if the choice is between noticeably higher or noticeably lower, we'd side with the former.
How Risky is this Market?
The May/June edition of the Financial Analyst Journal featured an article titled “Dimensioning the Housing Crisis” (available for download at CFAinstitute.org). The article is noteworthy for encapsulating the problems of the housing market in a mere 12 pages.
The article is replete with sundry graphs, most of which accentuate just how bad things got over the past two years. One graph features the spike in first-time defaults; another features the seemingly exponential growth in housing overhang; yet another features the precipitous drop in cure rates for 30-day, 60-day, and 90-day delinquencies. The author notes, in pointed prose, that “we have a housing problem that affects 11 million to 12 million units. If nothing is done, more than one homeowner out of every five will face eviction.”
It's a pessimism-inducing article, to be sure, but we remain upbeat nonetheless. Reason being, these problems are well documented today, which means there are few shocks left to rock the market. What's seen isn't what kills, it's what's unseen.
Savvy buyers know that the time to buy isn't when everything is dear but when everything is disdained. Everything in housing isn't disdained, but sentiment remains low. So, we ask ourselves, was it riskier to buy a house in 2006 or is it riskier to buy one today? The sentiment feels riskier today, but the data show that 2006 was overwhelmingly riskier.
Tuesday, June 8, 2010
Keeping you updated on the market!
For the week of
June 7, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.
For the week of
June 7, 2010
--------------------------------------------------------------------------------
MARKET RECAP
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.
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